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The Action Principle in Market Mechanics

Author

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  • Manhire, J. T

    (Texas AM University)

Abstract

This paper explores the possibility that asset prices, especially those traded in large volume on public exchanges, might comply with specific physical laws of motion and probability. The paper first examines the basic dynamics of asset price displacement and finds one can model this dynamic as a harmonic oscillator at local "slices" of elapsed time. Based on this finding, the paper theorizes that price displacements are constrained, meaning they have extreme values beyond which they cannot go when measured over a large number of sequential periods. By assuming price displacements are also subject to the principle of stationary action, the paper explores a method for measuring specific probabilities of future price displacements based on prior historical data. Testing this theory with two prevalent stock indices suggests it can make accurate forecasts as to constraints on extreme price movements during market "crashes" and probabilities of specific price displacements at other times.

Suggested Citation

  • Manhire, J. T, 2017. "The Action Principle in Market Mechanics," LawRxiv 29c7s, Center for Open Science.
    • Handle: RePEc:osf:lawarx:29c7s
    DOI: 10.31228/osf.io/29c7s
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    References listed on IDEAS

    as
    1. McCauley, Joseph L., 2006. "Response to worrying trends in econophysics," MPRA Paper 2129, University Library of Munich, Germany.
    2. Vygintas Gontis & Shlomo Havlin & Aleksejus Kononovicius & Boris Podobnik & H. Eugene Stanley, 2015. "Stochastic model of financial markets reproducing scaling and memory in volatility return intervals," Papers 1507.05203, arXiv.org, revised Oct 2016.
    3. Mirowski, Philip, 1984. "Physics and the 'Marginalist Revolution.'," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 8(4), pages 361-379, December.
    4. Gallegati, Mauro & Keen, Steve & Lux, Thomas & Ormerod, Paul, 2006. "Worrying trends in econophysics," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 370(1), pages 1-6.
    5. Gontis, V. & Havlin, S. & Kononovicius, A. & Podobnik, B. & Stanley, H.E., 2016. "Stochastic model of financial markets reproducing scaling and memory in volatility return intervals," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 462(C), pages 1091-1102.
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